Expert Opinion

John Kenel: 5 Reasons Why Rents will Rise

1. Higher Deposit Requirements

Forget the days of 10% deposits – 95% of loans for property investments will now require 40% deposits on pre-existing property as the result of new legislation introduced in September last year. This new loan-to-value ratio was originally targeted just at Auckland but has now been implemented nationwide. With the average Auckland property costing $975,087, investors may need to front up as much as $390,000 just for the deposit. The new regulations were introduced to help first home buyers gain a foothold in the market, but may have a serious negative impact on those who rent. These restrictions apply only to major banks (your ASB and ANZ’s for example) and non-bank lenders can make up the difference, but if a property costs more upfront to your landlord it can be expected that cost will be reflected in the rent.

2. Higher Demand for Rental Property

New Zealand is experiencing an influx of immigration like never before. 2016 saw the biggest population jump in NZ history- 97,000 people- and that consisting disproportionately of new immigrants. Fewer people are leaving New Zealand, as well; as Australia’s economy slows down and the trend of New Zealand immigration across the ditch reverses, the numbers remaining in NZ continue to grow. This trend shows no signs of slowing down. New immigrants can encourage construction but few come prepared to buy a house outright, and a large new group of people all seeking rental properties in the major job/population hubs will drive up costs.

3. Tighter Lending Criteria

Banks are really cracking down on lending to investors and developers. They are not getting enough money deposit by savers, so they have to cut back on lending. ANZ’s head of mortgages Glen Stevenson has stated that while the bank is still lending to investors the new rules have cut out a chunk of market. This makes borrowing more difficult and expensive, discouraging investment and development in rental property.

4. House Prices

The average house price in New Zealand has been increasing for the past few years – by 6.5% last year and 15.6% the year before that. While average rent costs have also been increasing, buying and selling is currently the more financially appealing prospect. That means fewer buildings being held long term and being made available to renters and that doesn’t look likely to change in the future.

5. Interest Rates

Interest rates have been rising for the past half year, with all the major banks having increased their rates to 5.4%. While down from 9.34% ten years ago that still constitutes a rise from the 4.58% of 2016. There is no indication that these rates will decrease, in fact, Prime Minister Bill English himself has stated that he sees interest rates increasing steadily in the future. Rising interest rates means rising costs for property investors, and that will soon translate to increased rents.

So What Does This Mean for Rents?

If you are a renter, brace yourself for 2017, because these five factors are all contributing and greatly increasing the trend of rising rental prices in New Zealand. Until measures are taken to address these issues, both renters and property investors can expect a hefty jump in prices over the coming months and years.